Thursday, July 15, 2010

Stay The Course - Deregulation of transport fuels is a bold, welcome move

A Times of India Article (Mon, June,28)-------------------------------------------------------------------------------

After an aborted attempt by the NDA regime in 2002 to deregulate fuel prices, the UPA administration has finally bitten the bullet and moved on implementing the Parikh committee recommendations. True, this is still a first step. While petrol price has now been pegged to the international market, diesel remains partly controlled and LPG and kerosene wholly so. But given the price hikes across the board and the planned deregulation of diesel that is to be implemented in phases it is a crucial one. The first beneficiaries will be state-run oil companies with under-recoveries dropping from Rs 770 billion to Rs 530 billion. But the ripple effect will, in actuality, spread far beyond that with benefits accruing to consumers in the long term. The challenge now is for the government to stand firm against the inevitable political backlash and populist demands.

Given that inflation is as much a function of perception as actual inflationary pressure, a short-term rise in prices of goods and services is perhaps inevitable. But there are several factors that could contain and counter this in the longer run. A decreased subsidy burden on the government will mean a reduced deficit and healthier public financing, exerting downward pressure on prices. And, crucially, by moving to deregulate transport fuels, the government has made competition viable. Private players unable to cope with an uneven playing field where the government mandated loss-inducing price levels, then underwrote public companies' deficits, will now have an incentive to re-enter the market. And an open market means competitive pricing and inducement for investment to bankroll both the breadth and quality of services, eventually benefiting consumers.

There are other non-quantifiable benefits as well. Exposure to price fluctuations in the international market could provide an incentive for energy efficiency and the development of alternative energy and clean technology that is lacking in the present protected economic environment. It could, in short, bring home the energy security and environmental concerns that are shaping discourse between the leading global economies today. And that is all to the good.

Questions remain, however. The government has left itself a back door of sorts by reserving the right to step in and insulate consumers if global price levels rise beyond a certain point. More specificity is needed here to prevent it from becoming an easy way out, to be employed when politically convenient. And while kitchen subsidies cannot and should not be wholly done away with for both political and socio-economic reasons, scope for price rationalisation in line with the Parikh committee recommendations remains. New Delhi has taken the crucial first step. Now it has to stay the course.